I often write about how financial advisers can help their clients who claim reduced Social Security benefits early and regret it later take steps to reset their benefits.
Sometimes it means repaying benefits that they have received over the previous year. Other times, it involves suspending their benefits for a few years.
Both tactics result in higher benefits later.
Now a new white paper from ClientFirst Financial, a practice management and marketing firm that distributes Social Security Explorer, an income-planning software program, lays out the details of both reset strategies for advisers and quantifies the potential increase in lifetime income for clients.
“Understanding how the Social Security suspend-and-restart rule works can open doors for advisers to a large new pool of prospects while significantly increasing and adding value to their existing client base,” ClientFirst principal Frank Horath and his colleague Martha Shedden wrote in a case study available at clientfirst.info.
“Imagine that you are the one or one of only a few advisers in your community who could offer [clients] not one but two opportunities to "supersize' their Social Security income,” they wrote.
The ClientFirst white paper presents the following example of the value of restarting Social Security benefits.
Jim is about to turn 66 and has a life expectancy of 85. His wife, Linda, just turned 63, and with a family history of longevity, she expects to live until 95.
Both Jim and Linda began collecting reduced Social Security benefits at 62.
Although he had a primary insurance amount — his full retirement age benefit — of $2,200 per month and she had a PIA of $1,400 per month, they are collecting just 75% of those amounts because they claimed their benefits four years early.
Jim collects $1,650 per month, and Linda collects just $1,050. (The examples don't include annual cost-of-living adjustments.)
If they continue to take their monthly income amounts between 62 and their individual life expectancies, the paper estimates that they will receive $964,800 in total income over their joint lifetimes.
But Jim and Linda can take steps to increase their lifetime income.
At their full retirement age, which is 66 for anyone born from 1943 through 1954, they each can file for a voluntary suspension of benefits, in effect turning off their monthly Social Security income check and restarting it at a later date up to 70.
During that four-year window between 66 and 70, Jim and Linda's benefits would increase by 8% per year due to the delayed-retirement credits. Then at 70, they would resume collecting their monthly Social Security checks, which would have grown by a total of 32%.
By using the voluntary-suspension strategy, the paper estimated that Jim and Linda would increase their lifetime income by more than $96,000 if they both lived until their assumed life expectancies. Due to her significantly longer life expectancy, the majority of the additional lifetime income would come from larger survivor benefits.
Survivor benefits are worth 100% of what the deceased worker collected or was entitled to collect at the time of death. So by maximizing Jim's retirement benefit, it also locked in larger survivor benefits for Linda.
EVEN BETTER WAY?
But in some cases, there may be an even better way to supersize Social Security benefits.
I received an e-mail from an adviser in Knoxville, Tenn., on this very topic. She said that the software she uses, Social Security Analyzer (ssanalyzer.com) recommended that a client repay his benefits and restart them later at a higher level.
He can do that if he is within 12 months of first claiming Social Security. He can withdraw his application, as the software recommended, repay the benefits and restart them at a later age. His benefits starting at 70 would be worth 132% (plus intervening COLAs) of this full retirement age amount.
If his spouse or minor dependent child received benefits on his earnings record, he would have to repay those benefits, too.
In the long run, the repayment option would result in a higher benefit: 132% of PIA, versus 99% of PIA for the voluntary-suspension strategy outlined in the case study paper above.